IBM gorges on cheap debt for share buybacks, acquisitions

IBM sometimes behaves like a bank, and sometimes like a private equity firm. Sometimes it even behaves like an IT vendor.

This week, in selling $1bn in debt for doing acquisitions, Big Blue is behaving like a private equity firm. The debt is being sold between Monday and Thursday this week and pays out 2 percent on 30 November, 2015, which is 0.55 per cent (or 55 basis points in the financial lingo) better than bonds of similar term being sold by the US Treasury.

The reason why so many private equity firms can run roughshod over the global economy is that interest rates are about as low as they can go. This means investors backing these equity firms, who want a better return than is possible in the stagnating (but recovered) stock market and who are not stupid enough to put their money in the bank with its piddling interest, are willing to give them big bags of money to sniff out attractive and profitable software companies that can be milked for even more profits. With interest rates so low, it makes very little sense to blow your cash hoard on acquisitions when you can borrow to do it. IBM will do a bit of both, it looks like.

According to another filing with the Securities and Exchange Commission, IBM sold $1.5bn in debt in the first week of August at a mere 1 per cent payout three years from now, which according to a report in Bloomberg is the lowest interest rate ever paid for debt sold into the market. IBM sold just under $2bn in notes in November 2009, €750m worth in October 2008 into the European debt market, and $4bn in October 2008 here in the US. Another $1bn was floated in July 2008 and $3.5bn in January 2008. Clearly, with IBM having such a high credit rating and a low cost of borrowing, the company could borrow a very large amount of money from the bond market during the Great Recession.

Unlike the days of old, you might get fired for buying IBM iron these days, but you are probably not going to get fired for buying IBM debt.

As IBM ended the third quarter, it had $9.86bn in cash and equivalents, $1.22bn in marketable securities, but $5.56bn in short-term and $21.9bn in long-term debts. Most of that long-term debt is associated with the money IBM loans its channel partners to acquire its hard and soft wares and the leases that it creates for direct customers. So IBM's net cash position is closer to $5.5bn. In today's IT market, where feisty and threatening startups are selling for billions, that is simply not a lot of money. And that is another reason why Big Blue is borrowing.

Of course, if IBM stopped buying back its own shares at such a crazy pace, it would have cash and would not have to borrow at all. But as IBM's president, chief executive officer, and chairman Sam Palmisano explained back in May, the company is engineering itself to double earnings per share to $20 or more by 2015 (double profit levels in 2009) and plans to spend $70bn on share buybacks and dividends in the next five years. There's another $20bn in acquisitions over those five years, with $8bn of that coming from cost savings and the rest apparently coming through cash flow and debt. ®